Service Tax on Builders

Any service provided or to be provided to any person, by any other person, in relation to construction of complex. [Section 65 (105) (zzzh)]

Value of taxable service:

It shall be the gross amount charged by the service provider for such service provided or to be provided by him.

In this context, it also becomes necessary to know some of the other related definitions which are discussed hereunder:

Construction of complex means:

a) Construction of a “new” residential complex or a part thereof; or
b) Completion & finishing services in relation to residential complex such as glazing, plastering, painting, floor & wall tiling, wall covering & wall papering, wood & metal joinery & carpentry, fencing & railing, construction of swimming pools, acoustic applications or fittings & other services; or
c) Repair, alteration, renovation or restoration of, or similar services in relation to residential complex.

“Residential complex” means any complex comprising of:

a) A building or buildings having more than twelve residential units
b) A common area; and
c) Any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,
located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

“Personal use” includes permitting the complex for use as residence by another person on rent or without consideration

“Residential unit” means a single house or a single apartment intended for use as a place of residence.

Doubts:

Certain doubts did arise w.r.t. applicability of service tax in cases where developers/ builders/ promoter enters into an agreement with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction or even prior & who makes construction linked payment. Different views were construed in this regard.

One view was that once an agreement of sale is entered into with the buyer, he becomes the owner of the residential unit & hence all the subsequent activity of a builder for its construction will be a service of “Construction of residential complex” to the customer & hence service tax would be applicable on it.

Another view / argument is that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit the transaction of sale is completed only after complete construction of the residential unit. Till the completion, the property belongs to the builder & any service provided by him towards construction is in the nature of self service which is not taxable. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of “residential complex” as defined for the purpose of levy of service tax & hence such construction would not attract service tax.

Clarification:

C.B.D.T. examined the matter & came out with the clarification in this regard vide circular no. 108/02/2009-ST dated 29.01.2009

The board is of the view that the initial agreement between the promoters/ builders/ developers & the ultimate owner is in the nature of “agreement to sell”. Further, as per the Transfer of Property Act, such a case does not by itself create any interest in or charge on such property & the property remains under the ownership of seller only. Only after successful completion of construction & on full payment of agreed amount, a sale deed is executed & ownership is transferred to the buyer. Thus, any service provided till the execution of such sale deed would be in nature of “self service” & consequently would not be liable to service tax. Further, if ultimate owner only enters into an agreement, even then, such activity would not attract service tax because this case would then fall under exclusion provided in the definition of “residential complex”.

However, in both cases, if services of any person such as contractor, designer or a similar service provider are received, then such person would be liable to service tax.

Further, any decision of A.A.R. in a specific case, which is contrary to above views would have limited applicability to that case only.

Source:

The Finance Act
C.B.D.T. circular no. 108/02/2009-ST dated 29.01.2009

Nilekani quits Infy board

The government on Thursday set in motion the process of providing a Unique Identification Number to India's citizens and appointed Infosys Technologies co-chairman Nandan Nilekani as head of an authority for this purpose.
Nilekani stepped down from the Infosys board after this appointment.
"The board of directors at Infosys has already accepted Nilekani's resignation. The resignation would be effective from July 9, 2009," the company said.
Nilekani will take charge as chairman of the Unique Identification Authority of India with the rank of Cabinet minister.
As co-founder of India's second-largest software exporting firm, Nilekani served as director on the Infosys board since its inception in 1981.
Between March 2002 and June 2007, he served as the company's chief executive officer and managing director.
He was later re-designated as co-chairman of the board of directors.
"We are glad that an extraordinary individual like Nandan has got an opportunity to add value to India through this position. As a company that has always put the interest of society ahead of itself, Infosys will accept his absence with a sense of duty to a larger cause," Infosys chairman and mentor N R Narayana Murthy said.
The move to set up the UID Authority of India, under the aegis of the Planning Commission, is aimed at providing a unique identity to the targeted population of the flagship schemes to ensure that the benefits reach them, information and broadcasting minister Ambika Soni told reporters here after the Cabinet meeting.
As chairman of the body, Nilekani will have Cabinet minister rank and status, she said.
"The authority shall have the responsibilities to lay down plans and policies to implement the Unique Identification Scheme, shall own and operate the Unique Identification number database and be responsible for its updation and maintenance on an ongoing basis," she said.
The authority will identify the targeted groups for various flagship programmes, she added.
The flagship schemes of the United Progressive Alliance include the National Rural Employment Guarantee Scheme, Sarva Shiksha Abhiyaan, National Rural Health Mission and Bharat Nirman.
The unique identification number would ensure that any lacuna in these schemes is removed so that the benefits do not reach those they are not meant for.
The government had earmarked Rs 100 crore (Rs 1 billion) in the interim Budget presented by finance minister Pranab Mukherjee in Parliament on February 16 to kickstart its ambitious Unique Identification Project.
The government has been working on improving arrangements to ensure that development deliverables reach the intended beneficiaries, Mukherjee had said.
In order to do so efficiently, effectively and economically, a comprehensive system of unique identity had been worked out, he had added.
The government also plans to set up state units of UIDAI, headed by state UID commissioners.
Earlier, an empowered group of ministers had approved setting up UIDAI with an initial core team in November 2008.

India: Offshore equipment supply not liable to tax

The profit that a foreign company earns by supplying equipment under a contract to an Indian customer outside Indian territory cannot be taxed in the country,according to a recent ruling by the Authority of Advance Rulings (AAR).
This decision was delivered in favour of South Korean company Hyosung Corporation, which had supplied offshore equipment to the Power Grid Corporation of India (PGCIL) as part of an agreement. The authority said that the foreign company’s income from this contract could not be taxed just because it was engaged in supervisory and testing work in India.
Taking note of the transaction details, the authority said the title of goods had been passed on to PGCIL beyond the Indian territory and, hence, outside the scope of the income-tax net. While this order is based on conditions that were specific in this case, the ruling can have a persuasive effect on tax authorities in cases with similar transactions.
In 2005, PGCIL had invited bids for the execution of works related to the Tehri Pooling Station Package associated with Koteshwar Transmission System, in which Hyosung had emerged as the successful bidder.
As per the bidding norms, the South Korean company was awarded the contract for offshore work while the onshore supply of goods and services was to be conducted by Larsen & Toubro (L&T).
The revenue department said since a number of offshore activities had taken place in India and, therefore, a part of the profits arose from India, they were liable to be taxed in the country. Hyosung argued that no part of its income relating to the offshore supply contract had been earned in India. AAR also ruled that the association between Hyosung and L&T was not an association of persons. It is difficult for foreign companies to claim tax credit in their country against the tax paid if they are taxed as association of persons.
AAR ruled that documentary evidence highlighted that the title of the goods was transferred while the goods were outside Indian territory.

Employees' Provident Fund rate will not change in financial year 2009-2010

The Employees' Provident Fund Organisation will not be able to pay more than 8.5 per cent interest on PF deposits during 2009-10 as it has no reserves left following a Rs 139 crore (Rs 1.39 billion) deficit incurred last fiscal. "There are no reserves which could be used as alternative option for additional funds for giving higher rate of interest than 8.5 per cent this fiscal", said an agenda note for next month's meeting of the Central Board of Trustees to be chaired by Labour Minister M Mallikarjun Kharge.The CBT, the highest policy-making body of the EPFO, is meeting on July 4, to discuss and recommend the interest rate on PF deposits for the current fiscal.In the agenda listed for the CBT (advisory body) meeting, the EPFO's finance Committee recommended that "8.5 per cent interest rate on PF deposits for this fiscal is feasible and leaves a surplus of Rs 6.4 crore (Rs 64 million)." Once the CBT, which is headed by the Minister, recommends the interest rate on PF deposits, it is sent to the Finance Ministry for final approval.
During the last fiscal, EPFO had to suffer a deficit of around Rs 139 crore to maintain interest rate of 8.5 per cent. This deficit was later made up from the available Contingency Fund of around Rs 150 crore (Rs 1.5 billion).

Provision for warranty under section 37 of IT Act, 1961 is allowable

Provision for warranty under section 37 of IT Act, 1961 is allowable if in past defects were there in products: SC
SUMMARY OF CASE LAW
If the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37
CASE LAW DETAILS
Decided by: SUPREME COURT OF INDIA, In The case of: Rotork Controls India (P) Ltd.v. CIT, Appeal No. CIVIL APPEAL NOS. 3506-3510 OF 2009, Decided on: MAY 12, 2009
RELEVENT PARAGRAPH
10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.
11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983- 84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator
without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events
resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case.
13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterpris e because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.
14. In this case the High Court has principally gone by the judgment of the Supreme Court in the case of Shree Sajjan Mills (supra). That was the case of gratuity. For the assessment year 1974-75 the assessee-company sought to deduct a sum of Rs.18,37,727/ - towards the amount of gratuity payable to its employees and worked out actuarially. No provision was made for Rs.18,37,727/ -. The claim for deduction was made on the ground that the liability stood ascertained by actuarial valuation and, therefore, was deductible under Section 37 of the 1961 Act. The ITO allowed the deduction only in respect of the amounts actually paid by the assessee and the rest was disallowed on the ground of non-compliance with the provisions of Section 40A(7) of the 1961 Act. This view of the ITO was affirmed by CIT(A). The Tribunal held that for the earlier assessment year relating to 1973-74, actuarially ascertained liability for gratuity arising under Payment of Gratuity Act, 1972 was an allowable deduction. However, for the assessment year in question, the Tribunal held that the increased liability claimed by the assessee for deduction was allowable on general principles of accounting. This view was taken by the Tribunal on the basis that the actuarially determined liability was not provided for in the assessee's books of account. In appeal by the Department, the High Court held that the assessee was not entitled to deduction without complying with the provisions of Section 40A(7) of the 1961 Act. This view of the High Court was affirmed by this Court. It was held that Section 40A(7) which stood inserted by Finance Act, 1975 w.e.f. 1.4.73 has been given an overriding effect over Section 28 as well as Section 37 of the 1961 Act. Consequently, the deduction allowable on general principles was ruled out as Section 40A(1) made it clear that Section 40A had effect notwithstanding anything contained in Sections 30 to 39 of the 1961 Act. In other words, as regards deduction in respect of gratuity, the assessee was required to comply with the provisions of Section 40A(7) after Finance Act, 1975. It is interesting to note that prior to 1.4.73 actual payment or provision for payment was eligible for deduction either under Section 28 or under Section 37 of the 1961 Act. This has been reiterated in Shree Sajjan Mills (supra). The position got altered only after 1.4.73 Before that date, provision made in the P & L Account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis could be deducted either under Section 28 or Section 37 of the 1961 Act. This has been explained in Shree Sajjan Mills (supra) at page 599. Section 40A(7) deals only with the case of gratuity. Even in the case of gratuity but for insertion of Section 40A(7), provision made in the P & L Account on the basis of present value of the contingent liability properly ascertained and discounted on an accrued basis was entitled to deduction either under Section 28 or under Section 37 of the said Act. This aspect, therefore, indicates that the present value of the contingent liability like the warranty expense, if properly ascertained and discounted on accrued basis, could be an item of deduction under Section 37 of the said Act. This aspect is not noticed in the impugned judgment. We may add a caveat. As stated above, the principle of estimation of the contingent liability is not the normal rule. As stated above, it would depend on the nature of business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting being adopted by the assessee. It will also depend upon the historical trend. It would also depend upon the number of articles produced. As stated above, if it is a case of single item being produced then the principle of estimation of contingent liability on pro rata basis may not apply. However, in the present case, it is not so. In the present case, we have the situation of large number of items being produced. They are sophisticated goods. They are supported by the historical trend, namely, defects being detected in some of the items. The data also indicates that the warranty cost(s) is embedded in the sale price. The data also indicates that the warranty is attached to the sale price. In the circumstances, we hold that the principle laid down by this Court in the case of Metal Box Company of India (supra) will apply. In that case this Court held that contingent liabilities discounted and valued as out-of- necessity could be taken into account as trading expenses if these were capable of being valued. It was further held that an estimated liability even under a gratuity scheme even if it was a contingent liability if properly ascertainable and if its present value stood fairly discounted, was deductible from the gross profits while preparing the P & L Account. In view of this decision it became permissible for an assessee to provide, in his P & L Account, for the estimated liability under a gratuity scheme by ascertaining its present value on accrued basis and claiming it as an ascertained liability to be deducted in the computation of profit and gains of the previous year either under Section 28 or under Section 37 of the 1961 Act. However, the above principle would not apply after insertion of Section 40A(7) w.e.f. 1.4.73. It may be stated that the principles of commercial accounting, mentioned above, formed the basis of the judgment of this Court in the case of Metal Box Company of India (supra) and those principles are affirmed by the judgment of the Supreme Court in Shree Sajjan Mills (supra) upto 1.4.73. In this case we are concerned with warranty claims. In respect of warranty claims during the relevant assessment years in question there is no provision similar to Section 40A(7) of the 1961 Act. We may add that the above principle of commercial accounting in Metal Box Company of India (supra) also find place in the judgment of this Court in the case of Madras Industrial Investment Corporation Ltd. v. Commissioner of Income-tax - (1997) 225 ITR 802 (SC), in which the Court has explained the meaning of the word "expenditure" in Section 37 of the 1961 Act. In other words, the principle enunciated in Metal Box Company of India (supra) which has been reiterated in Shree Sajjan Mills (supra) (upto 1.4.73) which deals with making of provision on the basis of estimated present value of contingent liability holds good during the assessment years in question qua warranty claims.
17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. (supra) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophisticated (specialiased) goods manufactured and sold by the assessee whereas the case of Indian Molasses Co. (supra) was restricted to an individual retiree. On the other hand, the case of Metal Box Company of India (supra) pertained to an army of employees who were due to retire in future. In that case the company had estimated its liability under two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to a number of years. In such a case it was held by this Court that the provision made by the assessee-company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this Court in the case of Bharat Earth Movers (supra). In that case the assessee company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Company of India (supra), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in the case of Civil Appeal Nos. of 2009 - Arising out of S.L.P.(C) Nos.14178-14182 of 2007 - M/s. Rotork Controls India (P) Ltd. v. Commissioner of Income Tax, Chennai, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under Section 37 of the 1961 Act. However, the High Court has failed to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade.

Lost Your PAN Card -What next

Lost Your PAN Card

First of all Don't panic. It is very simple to reapply it. Most of the people thinks that to apply PAN is longer process and it takes even longer when to reapplying it. But reapplication of PAN is a very simple process.

How to Get New PAN Card if Pan Card Lost? Step by Step
§ First of All If you have lost your PAN card, you need to notify the police and get an FIR from your local police station. You also need to write a letter requesting the issue of a duplicate PAN card. (for escaping from any misuse of lost or misplaced PAN Card)
§ Second You need to fill in a change request or correction form. (http://tin-nsdl.com/downloads/Form-49A-1_110708.pdf)
§ "You can also download a correction form from the websites of UTI Technology Services Ltd (UTITSL), National Securities Depository Ltd (NSDL), or the I-T department—‘www.utitsl.co.in’, ‘www.tin-nsdl.com’ or or you can get a hard copy from any of the branches of UTITSL and NSDL. You can easily locate your nearest centre from the websites of UTITSL, NSDL or the I-T department."
§ Now fill out the lost PAN card information on the form. In case you don’t have the number, you can retrieve the number of the lost card from‘‘https://incometaxindiaefiling.gov.in/knowpan/knowpan.jsp’—(link) . You only need to fill your name, date of birth and your father’s name to get your lost card number.Attach stamp-sized photograph along with cash 94. Submit your form at PAN application centres of UTITSL and NSDL, the addresses of which are available at the I-T department website, and you will get a new card in 15 working days.

Service tax on services rendered from outside India

Service tax on services rendered from outside India - A peep into judicial decisions?

THE Finance Act, 2006 inserted a new section 66A in the Finance Act, 1994 (‘Act’) dealing with statutory provisions of service tax. According to the explanatory notes to the Finance Bill, 2006, the objective of inserting the new section 66A was to levy service tax on taxable services provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India under reverse charge method.

As a consequence, explanation added at the end of section 65(105) of the Act in 2005 was omitted. The new section paves way to the clear legislative intention of the Central Government on the taxation of taxable services rendered by non-resident persons from outside India (i.e., outside the territorial limits of India) to a person in India.

Person Liable

Section 68 of the Act provides for payment of service tax. Accordingly, every person providing taxable service to any person shall pay service tax at the specified rate in prescribed manner. Sub-section (2) provides that Central Government is empowered to notify any taxable service on which service tax shall be paid by such person in prescribed manner as notified and such person shall be the person liable for paying service tax in relation to such service. Notification no. 36/2004-ST as amended by Notification no. 9/2006-ST dated 19/04/2006 notified that service recipient shall be the person liable for any taxable service provided or to be provided from a country other than India and received in India under section 66A of the Act. Rule 2(1)(d) of the Service Tax Rules, 1994 (‘Rules’) prescribe person liable for paying service tax. According to clause (iv), taxable service received from a non resident were taxable in India in the hands of the recipient receiving such taxable service in India. W.e.f. 19.4.2006, the recipient of service has been made the person liable in relation to any taxable service provided to be provided by any person from a country other than India and received by any person in India.

Judicial View

In the case of Aditya Cement vs. CCE, Jaipur II - 2007-TIOL-236-CESTAT-DEL, it has been held that Rule 2(1)(d)(iv) of the Rules only defines the person liable to pay service tax and cannot shift the liability on the person other than service provider unless proper notification is issued under section 68(2) of the Act. In the instant case, Rule 2(1)(d)(iv) of the Rules was examined with reference to Notification no. 36/2004-ST.

In another case of Molex (India) Ltd. vs. CCE (Appeals), Bangalore – 2007-TIOL-2305-CESTAT-BANG, it was held that question of leviability of service tax on the service recipient prior to 1.1.2005 has to be decided by a larger bench in view o f the conflicting decisions on the matter. As noted above, in the case of Aditya Cement (supra), it was held that service tax liability on recipient in case of import of service is only w.e.f 1.1.2005 in view of Notification no. 36/2004-ST and that the rules are subservient to the sections and if a section do not provide discharge of service tax liability by recipient of services from non-resident having no office, then it would be futile exercise to rely upon rules to collect the tax. (This was further followed by Ispat Industries Ltd. vs. CCE, Raigad – 2007-TIOL-399-CESTAT-MUM.In other case of Calvin Wooding Consulting Ltd. vs. CCE, Indore – 2007-TIOL-670-CESTAT-DEL, contrary view was taken that the liability to pay service tax for the services received from abroad is on the recipient [Also see Samcor Glass Ltd. vs. CCE, Jaipur 1 – 2007-TIOL-938-CESTAT-DEL]

In CCE vs. Rainbow Denim Ltd. – 2009-TIOL-389-CESTAT-DEL it was held that where service was provided by a non resident from outside India who does not have any office in India, having been specified as taxable service w.e.f. 1/1/2005 under Notification no. 36/2004-ST, receipt of such service could not be held liable for paying service tax prior to 1/1/2005.

In BHEL vs, CCE – 2009-TIOL-634-CESTAT-DEL, it was held that where service is provided by foreign companies who have no office in India, demand of service tax form service recipient is not sustainable for the period prior to 1/1/2005.

In Hindustan Zinc Ltd. vs. CCE, Jaipur – 2008-TIOL-1149-CESTAT-DEL-LB, larger bench observed that levy of service tax is on rendering to taxable service and not on person. Definition clause can not be read as substantive. The manner of collection of tax is not extendable to include person liable to pay service tax. It was held that service recipient of consulting engineering service provided from outside India was not liable to pay service tax prior to 1/1/2005. Since the liability to pay service tax is generally on the provider of service, where liability is to be fastened on any other person, the services in relation to which liability is to be so fastened, has also to be identified and specified. The services were notified w.e.f. 1/1/2005 vide Notification no. 36/2004-ST.

Section 66A

The Finance Act, 2006 inserted section 66A to levy service tax under reverse charge method on taxable services provided from outside India to a recipient in India. At the same time, explanation at the end of sub section (105) of section 65 of the Act as inserted in 2005 was omitted which also provided for the similar provision.

Section 66A applies to specific situation where any taxable service specified in section 65(105) is provided by a person from outside India and received by a person in India and in such situation, section 66 does not apply. In case of deemed import of services, section 66A becomes the charging section instead of section 66. Thus, these two section are mutually exclusive.

Section 66A of the Act imposes two conditions which needs to be satisfied for taxation of service tax on such imported services -

— service must be received by a person in India

— service provider must be situated outside India.

If both the above conditions are fulfilled, then only the question of levy of service tax arises. Import of services not meant for commercial use or business use shall not be taxable.

From When Liable - Judicial View

In a very recent case of Indian National Ship Owners Association vs. UOI – 2009 TIOL 150 HC MUM ST, the High Court held that -

(a) Notification no. 1/2002-ST dated 1/3/2002 does not levy service tax on the service recipient.

(b) Rule 2(1)(d)(iv) of the Rules does not apply to levy of service tax on services rendered from outside India .

(c) Service recipient can not be made liable to pay service tax under Rule 2(1)(d)(iv) unless there is a provision in the Act.

(d) For services received outside India, Rule 2(1)(d)(iv) would not apply as service were received by assessee outside India and not in India.

(e) W.e.f. 18.4.2006, vide section 66A, a persons resident in India or having business in India has been made liable to service tax as a recipient of service outside India.

(f) Members of petitioner association receiving various services outside India from non- residents were not liable to service tax period prior to 18/4/2006.

The court observed that vide notification no. 1/2002 (supra) service which is rendered or provided in the Continental Shelf Exclusive Economic Zone and Territorial Waters of India has been made taxable that notification does not have the effect of levying service tax on the recipients of the service. Therefore, levy of service tax on the members of the petitioners association on the basis of notification dated 1st March, 2002 is plainly without authority of law.

Where the vessels and ships owned by members of petitioner association received service outside India, court observed tax service tax can not be levied on the basis of Rule 2(1)(d)(iv) of the Rules.

Because of the enactment of section 66A of the Act, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India. From section 66A it is apparent that there was no authority vested by law in the respondents to levy service tax on a person who is resident in India, but who receives service outside India. In that case till section 66A was enacted a person liable was the one who rendered the service. In other words, it is only after enactment of section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of section there was no such provision in the Act and therefore, the respondents had no authority to levy service tax on the members of the petitioners association. In the ultimate analysis, court held that assessees, members of Ship owners Association receiving various service outside India from non resident were not liable to service tax for the period form 1st March, 2002 to 17th April 2006.

In the case of Malwa Cotton Spinning Mills vs. CCE – 2009-TIOL-185-CESTAT-DEL it was held that services rendered by non resident from outside India is not a taxable service for the period prior to insertion of section 66A w.e.f. 18.4.2006.

Conclusion

Based on the statutory provisions and judicial pronouncements, following position emerges -

(i) Levy of service tax is on rendering of taxable service and not on person.

(ii) No service tax is leviable on services received from abroad prior to 1/1/2005.

(iii) Receipt of taxable services from abroad from service providers not having office in India is taxable w.e.f. 1/1/2005.

(iv) Taxable services rendered is India by a service provider from outside India shall be taxed in India under section 66A of the Act w.e.f. 18/4/2006 and service receiver shall be liable to pay service tax under reverse charge method.

Source : TIOL

Chip Maker Xilinx Loses Tax Ruling

Chip Maker Xilinx Loses Tax Ruling

In a decision that could have wide tax implications for U.S. multinational companies, a federal appeals court handed a victory to the Internal Revenue Service in a dispute over how companies allocate their costs between different countries.The U.S. Court of Appeals for the Ninth Circuit ruled against chip company Xilinx Inc. on Wednesday May 27, overturning an earlier U.S. Tax Court opinion that went against the IRS.The case involves so-called transfer pricing, the complex arrangements companies use to allocate costs and revenue between operations in different tax jurisdictions. Transfer-pricing disputes between multinational companies and the IRS are drawing attention as companies do more business overseas and develop more sophisticated methods for cutting their taxes, particularly in the technology and pharmaceutical industries.In Xilinx's case, the San Jose, Calif., company allocated a portion of its research and development costs to an Irish subsidiary. However, when it came to stock options granted to the company's research employees, Xilinx kept in the U.S. the entire value of the tax deductions related to those options. None of the deductions were allocated to the subsidiary in Ireland, where corporate income-tax rates are significantly lower than in the U.S., thus lowering Xilinx's global tax burden.U.S. Treasury Department regulations dictate that all deductions and income in transfer pricing arrangements are allocated according to an "arm's length" standard - how unrelated companies would share those costs. Xilinx argued that unrelated companies wouldn't have shared the costs of the stock options.By a vote of 2-1, a panel of the appellate court ruled that the costs related to the options had to be shared, which would increase Xilinx's taxable income in the U.S.Xilinx said in a statement Thursday May 28 it doesn't agree with the Appeals Court decision, but that "it's too early to comment on any next steps the company may consider as a result." The company said the decision wouldn't have a material impact on earnings.The panel also held that a regulation limiting the IRS to the arm's length standard is in "irreconcilable" conflict with another regulation that gives the IRS authority to decide how R&D-type expenses should be allocated between corporate subsidiaries. As a result, the IRS could have broad new powers to adjust corporate tax returns."It's the most important transfer-pricing decision in this country in 20 years," said H. David Rosenbloom, an international tax attorney at Caplin & Drysdale. "It goes to the question of how broad the IRS's power is."The decision comes as the Obama administration targets tax-cutting by U.S. multinational companies, looking to raise $210 billion over the next decade by shutting down tactics that such companies use to cut their U.S. tax bills.